SAN FRANCISCO -- Who needs TheStreet.com New Tech 30 index when you have the Philadelphia semiconductor index, the chip-industry barometer known as the SOX? Not when the SOX shoots up 104 points in one session, as it did Tuesday, closing at 1170.46, a gain of 9.75%.

Since the beginning of the year, the index is up 66%. Compare that to the

Nasdaq Composite Index

, up 14%, and the

S&P 500

, a laggard that's down 7%.

"We have entered the irrational phase of the market," says Drew Peck, longtime semiconductor analyst at

SG Cowen

, speaking at

Robertson Stephens'

technology conference.

Investors are knocking each other over in their rush to buy. The result is that a once-lowly stock like

TranSwitch

(TXCC)

goes up 21 55/64 to close at 117 1/2 on Tuesday and

Applied Micro Circuits

(AMCC)

, another suddenly hot attraction, jumps 19 5/8 to close at 275 1/16. TranSwitch is now trading at 148 times 2001 estimated earnings, and AMCC at 220 times.

These valuations make Peck very nervous. He says he's maintaining buy ratings on the chip stocks he covers, but only by tossing out valuation as a factor.

That's not to say there is anything wrong with the chip industry, he says. Demand keeps growing as chips fly off the assembly lines into cell phones,

Palm Pilots

, televisions, cars, machinery, you name it, and the profits pour in. But the whimsy of future demand is built too heavily into current stock prices, Peck argues, and no one seems to care. That, he says, is the definition of a bubble waiting to burst.

"There is no historic precedent for this, there is no economic precedent for this," he says. "It will end badly and it's just a matter of when ... but I would have said that two months ago."

Clearly, some investors don't think this bubble will burst any time soon. Take money manager Martin Whitman of

MJ Whitman Capital

in New York, who bought into about a dozen chip-equipment companies in early October 1998, when the SOX hit a two-year low at 183.

Whitman is a value investor, one who tries to buy at the bottom. He's still holding onto many of those equipment stocks he bought 18 months ago, and good thing, too.

Gasonics

(GSNX)

, for example, which he bought at less than 4 a share, ended last year at 19 3/4. But it is since risen an additional 61%, closing Tuesday at 31 3/4.

"We never really sold out," Whitman says. As far as he's concerned, it is still too early to call a peak in the semiconductor cycle, despite a rise of 539% in the SOX index in less than 18 months. "How can you even begin to meet the demand predicted for the Internet," he says, "without an increasing demand for increasingly complicated chips?"

John Lazlo, former chip analyst at

PaineWebber

, says he's shopping for technology stocks at the conference for his new hedge fund, the

Tectonic Fund

. He argues that chip stocks are still a good buy. "The multiples are cheap in comparison to dot-com companies that are selling at a multiple of revenues," he says. "These are selling at multiples of earnings."

There's a specter hanging over chip investors: oversupply. Historically, demand for chips rises steadily over time, but supply rises and falls. That creates boom-and-bust cycles as chip prices rise and fall accordingly. The shrewd chip investor tries to call both the beginning and end of each boom cycle.

Robertson Stephens chip analyst Arun Veerappan says he closely watches chip inventory levels that companies like

Cisco

(CSCO) - Get Report

or

Nortel

(NT)

carry. If they rise, he says, that means their demand for equipment is likely slowing. That's the first sign of a market bust.

The problem, says Peck, is that the Ciscos of the world don't like to talk about inventory levels, so it is often hard to measure. "That's what makes people the most nervous," he says. But not nervous enough to sell. Not yet.